Student Researcher: Rosemary Scott
Community Evaluator: Tim Ogburn
Sonoma State University
November 26, 2008
In November 2008, Ecuador became the
first country to undertake an examination of the legitimacy and structure of
its foreign debt.
An independent debt audit commissioned by the
government of Ecuador documented hundreds of allegations of irregularity,
illegality, and illegitimacy in contracts of debt to predatory international
The loans, according to the report, violated,
Ecuador’s use of legitimacy as a legal argument
for defaulting set a major precedent; indeed, the formation of a debt
auditing commission sets a precedent.
In the 1970s Ecuador fell victim to unscrupulous international lending,
which encouraged borrowing at low interest rates. But in over thirty years
the country’s debt rose from $1.174 billion in 1970, to over $14.250 billion
in 2006, a twelve fold increase, due in large part to interest rates that
rose at the discretion of US banks and
Federal Reserve from six percent in 1979 to twenty-one percent in
The commission revealed that Salomon Smith Barney, now part of
Citigroup Inc., issued unauthorized restructuring of Ecuador’s debt in 2000
that lead to exorbitant interest rates, which, combined with illegal
borrowing by former dictators, has turned the country, along with many of
its Southern neighbors, into a major capitol exporter to its Northern
Over the years, the country has made debt
payments that far exceed the principal it borrowed.
Of all loans made between 1989 and 2006, fourteen percent was used for
social development projects. The remaining 86 percent was used to pay for
previously accumulated debt. Continuously from 1982 and 2006, the country
paid foreign debt creditors $119.826 billion for capital and interest, while
receiving over the same period $106.268 billion in new loans, which amounts
to a total negative transfer of $13.558 billion.
The human costs are staggering. Every dollar spent on illegitimate
international credit means less is available for fighting poverty. In
2007 the Ecuadorian government paid $1.75 billion in debt service alone,
more than it spent on health care, social services, the environment, and
housing and urban development combined.
While the risks of default are high, Ecuador had only two options:
World Bank system, which oversees
investment treaties, there is no public accountability, no standard judicial
ethics rules, and no appeals process.
Ecuador has thus exposed a major problem in the
international financial system: the lack of an international, independent
mechanism for countries to resolve disputes over potentially illegitimate
and/or illegal debt. Ecuador’s findings could set a precedent for the
poorest of indebted countries, whose debt burden has long been criticized as
predatory and inhumane.
Ecuador has called on Latin America to forge a united response to foreign
debt. Venezuela, Bolivia and Paraguay have recently created debt audit
commissions. The country has also asked the
United Nations to help develop international norms to regulate
the foreign debt market.
A bill pending in the US Congress presents an ethical step forward.
The Jubilee Act, which passed the House of
Representatives in April 2008, would require the Comptroller General to
undertake audits of the debt portfolios of previous regimes where there is
substantial evidence of odious, onerous, or illegal loans.
The legislation also instructs the Secretary of
the Treasury to,
“seek the international adoption of a
binding legal framework on new lending that... provides for decisions on
irresponsible lending to be made by an entity independent from the
creditors; and enables fair opportunities for the people of the affected
country to be heard.”
Update by Daniel
In June 2009, Ecuador announced that it had reached an agreement with
91percent of creditors to buy back its debt for 35 cents on the dollar,
confirming many analysts’ predictions that the default was a strategic move
aimed at getting a “haircut” on their debt.
Ecuador’s default drove down the price of their
debt, making a buyback far more affordable. Many analysts believe that
Ecuador had already started to quietly buy back debt on the secondary
market, a claim the government has declined to comment on. Ecuador was
expected to pay $1.075 billion for $3.375 billion in debt.
Following the December 2008 default on the Global Bonds 2012, Ecuador
defaulted on the Global Bonds 2030 in March.
Ecuador continued to pay the Global Bonds
2015, although there is widespread speculation that the successful
buyback will lead them to default on that debt, too. Some analysts disagree,
noting that allied Venezuela owns some of the 2015 bonds, while others say
that maintaining payment could be a way to stay in the free market’s good
The default and buyback received widespread coverage in the business press,
but aside from my article,
IRC Americas was the only English-language
outlet to dedicate in-depth analysis to the political and economic
significance of the debt auditing commission, illegitimate debt and default.
The Financial Times, undertaking a sober
analysis of the long-term impact of Ecuador’s default, noted,
“Analysts fear that the government’s
deliberate default on two bonds—almost a third of its foreign debt—could
prompt other countries to follow suit as they seek to navigate the
Investors are worried about the precedent
Ecuador is setting as the first country in decades to default while
technically having the ability to pay.
One prominent international investment advisor is quoted as saying that
Ecuador’s default was a,
“brilliantly run and managed process. They
nailed the timing.”
To get involved with the movement against
illegitimate debt, contact Jubilee USA (http://www.jubileeusa.org/).
Update by Neil Watkins
and Sarah Anderson
After Ecuadorian President Rafael Correa announced the default in
December 2008, the financial press smoldered with condemnations and
predictions of dire consequences for this small South American nation.
Most articles quoted only the harshest critics.
“lived up to its reputation as a banana
(Investor’s Business Daily)
Ecuador was “one of the axis of evil in
A separate article in the Financial Times
did quote two sympathetic analysts, but that effort at balanced reporting
was an extreme exception.
We found no examples of mainstream press reporting on the long history of
Ecuadorian activists calling for action to address illegitimate debts.
Indeed, Ecuadorian civil society had long advocated for the creation of a
commission to examine the nature of Ecuador’s debt. That commission was
founded in 2007, and its results formed the basis for the Correa
government’s decision to default.
The mainstream media gave the overwhelming impression that this default was
the result of the personal whim of a political extremist. Virtually every
story labeled Correa as a leftist and emphasized his ties to Venezuelan
President Hugo Chavez.
The analysts quoted reinforced this message.
“I think this default is nonsense. The
market sees it as politically motivated”
International Monetary Fund official said
the default reflected “a ridiculous ideology” (Bloomberg).
Meanwhile, activists associated with the global Jubilee network that has
campaigned for the cancellation of illegitimate debts in countries around
the world applauded Correa for fulfilling a campaign promise to respect the
findings of the debt audit commission. And Paraguayan President Fernando
Lugo announced less than a week after Ecuador’s default that his
government would also “exhaustively study” its debt.
In late April of this year, Correa was re-elected in a landslide, and as of
this writing, his government appears on the brink of successfully
negotiating with the holders of defaulted bonds.
Dow Jones is reporting that a very high
percentage of bondholders are expected to accept Correa’s offer of 35 cents
on the dollar.
As part of the response to the current financial crisis, governments should
establish an international mechanism to handle debt disputes in a systematic
way that balances the interests of debtors and creditors and considers how
debts were accumulated in the first place. A special United Nations
commission on the crisis, chaired by Nobel Prize economist Joseph
Stiglitz, came out in March 2009 in support of such a mechanism.
But thus far, the issue is not even on the table
within the G20 grouping of the most powerful nations.
financial crisis hitting heavily indebted
poor countries hard, there will be greater pressures on developing nations
to default. Instead of demonizing leaders who default, it’s time for the
international community to develop a fair solution that addresses the real
impacts of crushing debt on the poor.
For more information, see: